DBS chief Piyush Gupta collected S$10.3 million salary in 2017

Singapore

DBS Group Holdings chief executive Piyush Gupta enjoyed a 23 per cent jump in his 2017 pay to S$10.3 million, the bank revealed on Wednesday in its latest annual report.

In 2016, Mr Gupta took home S$8.4 million, down 23 per cent from 2015 as South-east Asia's biggest bank saw its profit slip because of higher charges for bad debts from its oil and gas loans.

DBS posted a new high of S$11.9 billion in income for 2017, while net profit increased 4 per cent to a record S$4.39 billion.

United Overseas Bank chief executive Wee Ee Cheong got an 11 per cent pay rise to S$9.4 million for 2017, according to the bank's annual report released on Wednesday. Mr Wee and his family own some 18 per cent of UOB.

Mr Gupta said he thinks a return on equity (ROE) of 13 per cent is a doable target, in his shareholders' message. ROE in 2017 fell to 9.7 per cent from 10.1 per cent in 2016.

DBS' ROE is typically lower than its smaller peers. OCBC's 2017 ROE was 11.2 per cent up from 10 per cent in 2016. UOB's 2017 ROE of 10.2 per cent was unchanged from the previous year.

Mr Gupta said DBS' ROE since 2010 has been around 11 per cent, similar to the preceding decade. He sees an improvement for ROE to come from three factors: higher interest rates, reduction in capital requirement, and lower cost from digitalisation.

"Normalising for allowances, our 2017 ROE would also have been at that level. However, the underlying returns of our business have been rising since 2010," he said.

Wealth management income has quadrupled during the period and now accounts for 18 per cent of group income, while cash management income crossed S$1 billion this year from almost nothing, he added.

"Both are low-capital-usage and high-returns businesses. The proportion of capital-intensive trading income has halved to one-tenth of group income. These improvements have been masked by the low interest rate environment and a build-up of our capital, both of which are now being reversed."

Interest rates have been low over the past decade, said Mr Gupta.

Three-month Singapore-dollar interbank rates, the benchmark for pricing domestic loans, last peaked in 2006 at 3.5 per cent, declined during the global financial crisis and then stayed below 1 per cent until 2015. They have been hovering around 1 per cent since then.

"With reflation in the global economy well underway, the general view is that interest rates around the world are on a cyclical upturn. Given our balance sheet structure, a 1 percentage point increase in domestic interest rates roughly translates into a 1 percentage point improvement in ROE," said Mr Gupta, adding that with the publication of Basel regulatory requirements in December, DBS finally has clarity on capital requirements.

"The capital we have been building up because of the uncertainty can now be returned."

DBS announced a special dividend of 50 Singapore cents per share as the initial step to recalibrate its Common Equity Tier 1 (CET1) ratio closer to its long-term target of 13 per cent compared to the 14 per cent it has been operating on. It also raised the annual payout to S$1.20 per share.

"The reduction in CET1 will be another driver for improving ROE," said Mr Gupta. A third ROE driver is the improvement to the cost-income ratio that digitalisation brings.

Digitalisation lets DBS increase market share at lower marginal costs in developed markets and scale profitably into the granular SME and mass consumer segments in emerging markets.

A 5 percentage point improvement in the cost-income ratio translates into a 1 percentage point improvement in ROE. These three drivers will contribute to DBS's ROE at their own pace and cycles.

"We believe a ROE of 13 per cent is readily achievable," said Mr Gupta.

DBS also renamed itself as the Digital Bank of Singapore on the annual report cover to showcase its digitalisation progress. With the digital revolution, banking is being fundamentally redefined.

"The explosion of big data means that as we go forward, a huge part of the battle for the customer will be fought along data lines," added the DBS chief.